CHAPTER 12
NATIONAL INCOME ACCOUNTING
2nd Semester, S.Y 2013 – 2014
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 111 – ECONOMIC ANALYSIS
National Income Accounting
National income accounting is a framework
that summarizes and categorizes productive
activity in an economy over a period of time.





GDP
GNP
GDP Per Capita
National Income
PCI
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 111 – ECONOMIC ANALYSIS
GDP: An Economic Barometer
 What exactly is GDP?
 How do we use it to tell us whether our
economy is in a recession or how rapidly our
economy is expanding?
 And how do we compare economic well-being
across countries?
 How do we take the effects of inflation out of
GDP to compare economic well-being over
time?
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 111 – ECONOMIC ANALYSIS
What is gross domestic product (GDP)?
• Currency value (such as Philippine peso)
of all final goods and services produced
within a country in a given period
• Total income of a nation
• Measure of nation’s economic well-being
• Measure of a nation’s economic growth
from one period to the next.
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 111 – ECONOMIC ANALYSIS
Gross Domestic Product
GDP or gross domestic product is the market
value of all final goods and services produced
within a country in a given time period.
This definition has four parts:
 Market value
 Final goods and services
 Produced within a country
 In a given time period
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 111 – ECONOMIC ANALYSIS
Gross Domestic Product
Market value
 GDP is a market value—goods and services
are valued at their market prices.
 To add apples and oranges, computers and
popcorn, we add the market values so we
have a total value of output in pesos.
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 111 – ECONOMIC ANALYSIS
Gross Domestic Product
Final goods and services
 GDP is the value of the final goods and services
produced.
 A final good (or service) is an item bought by its final
user during a specified time period.
 A final good contrasts with an intermediate good,
which is an item that is produced by one firm, bought
by another firm, and used as a component of a final
good or service.
 Excluding intermediate goods and services avoids
double counting.
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 111 – ECONOMIC ANALYSIS
Let’s Check Your Understanding
Which of the following are final goods or services, and which
are intermediate goods or services?
1.
2.
3.
4.
5.
6.
A new automobile
An oil filter purchased in a new automobile
Banking services
Gasoline
A processor chip inside the tablet
A bread flour
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 111 – ECONOMIC ANALYSIS
Gross Domestic Product
Produced within a country
 GDP measures production within a country—
domestic production.
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 111 – ECONOMIC ANALYSIS
GDP versus GNP
Gross Domestic Product is the total market value
of all final goods and services produced in a
country in a given time period.
Gross National Product is the total market value
of all final goods and services produced by the
citizens of a country in a given time period.
GNP equals GDP plus net factor income received
from or paid to other countries.
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 111 – ECONOMIC ANALYSIS
Gross Domestic Product
In a given time period
 GDP measures production during a specific
time period, normally a year or a quarter of a
year.
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 111 – ECONOMIC ANALYSIS
What’s included in GDP?
𝐺𝐷𝑃 = 𝐶 + 𝐼 + 𝐺 + (𝑋 − 𝑀)
 Consumption expenditure
 Investment
 Government expenditure on goods and
services
 Exports of goods and services
 Imports of goods and services
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 111 – ECONOMIC ANALYSIS
What’s included in GDP?
Consumption expenditure is the spending
households on consumption goods and services.
by
Investment is the purchase of new capital goods (tools,
instruments, machines, and buildings) and additions to
inventories.
Government expenditure on goods and services is
expenditure by all levels government on goods and
services.
Net exports of goods and services is the value of
exports of goods and services minus the value of
imports of goods and services.
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 111 – ECONOMIC ANALYSIS
Consumption Expenditure
Consumption expenditure is the spending
by households on consumption goods and
services.
 Goods: groceries, clothes, gadgets
 Services: haircuts, oil changes
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 111 – ECONOMIC ANALYSIS
What’s included in GDP?
Investment by businesses and households
 Fixed assets for production
 New homes
 Inventories
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 111 – ECONOMIC ANALYSIS
What’s included in GDP?
Government expenditures by local and
national government




Roads and bridges
School buildings
Other public services
Excluding transfer payments
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 111 – ECONOMIC ANALYSIS
What’s included in GDP?
Net exports
– the value of exports of goods and services
minus the value of imports of goods and s
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 111 – ECONOMIC ANALYSIS
What are not included in GDP?






Intermediate goods
Used goods or Second-hand Sales
Underground production (black market)
Financial transactions
Household production and consumption
Transfer payments
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 111 – ECONOMIC ANALYSIS
What GDP does not tell us?
 Does not measure income distribution
 Does not measure non-monetary output or
transactions (e.g., barter, household activities)
 Does not take into account desirable
externalities, such as leisure or environment
 Does not measure social well-being
 Correlates to standard of living but is not a
measure of standard of living
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 111 – ECONOMIC ANALYSIS
Real and nominal GDP
When GDP is computed in the current year’s prices, rising prices (inflation) can
make it difficult to determine if a change in GDP from one year to the next is
due to the country’s production of more goods and services or to increases in
the price level.
 Nominal GDP: GDP that is not adjusted for inflation. This
reflects the current value of goods and services in current
prices. Thus, it ignores the effect of inflation on the growth of
GDP.
 Real GDP: measures the value of goods and services
adjusted for change in the price level. It reflects the real
change in output. This measure is called constant or adjusted
GDP or constant money GDP.
 Nominal GDP is GDP at current price Real GDP is GDP
adjusted for inflation.
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 111 – ECONOMIC ANALYSIS
Calculation of Nominal GDP
Year
Quantity
Price
Nominal GDP
Good A
1,000
850
850,000
Good B
2,000
1,750
3,500,000
Good C
1,500
25,800
38,700,000
Good D
4,000
350
1,400,000
Good E
2,500
755
1,887,500
Good F
1,800
475
855,000
TOTAL
47,192,500
𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃 = 𝑃𝑟𝑖𝑐𝑒 𝑥 𝑂𝑢𝑡𝑝𝑢𝑡
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 111 – ECONOMIC ANALYSIS
Calculation of Real GDP
Year
Quantity
(Aggregate
Output)
Price
Nominal
GDP
Price
Index
Real GDP
2009
1,000
50
50,000
33
1,500
2010
1,000
100
100,000
67
1,500
2011
1,000
150
150,000
100
1,500
2012
1,000
200
200,000
133
1,500
2013
1,000
250
250,000
167
1,500
𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 =
𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃
𝑃𝑟𝑖𝑐𝑒 𝐼𝑛𝑑𝑒𝑥
𝑃𝑟𝑖𝑐𝑒 𝑖𝑛 𝑎 𝑔𝑖𝑣𝑒𝑛 𝑦𝑒𝑎𝑟
𝑃𝐼 =
𝐵𝑎𝑠𝑒𝑑 𝑦𝑒𝑎𝑟
*Base Year is 2011
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 111 – ECONOMIC ANALYSIS
GDP Deflator
GDP deflator (implicit price deflator for GDP) is a measure
of the level of prices of all new, domestically produced, final
goods and services in an economy.
It helps to adjust the Nominal GDP to a Real GDP figure
𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃
𝐺𝐷𝑃 𝐷𝑒𝑓𝑙𝑎𝑡𝑜𝑟 =
𝑥100
𝑅𝑒𝑎𝑙 𝐺𝐷𝑃
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 111 – ECONOMIC ANALYSIS
GDP and the Circular Flow of
Expenditure and Income
 GDP measures the value of production, which
also equals total expenditure on final goods
and total income.
 The equality of income and output shows the
link between productivity and living standards.
 The circular flow diagram illustrates the
equality of income, expenditure, and the value
of production.
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 111 – ECONOMIC ANALYSIS
Approaches in GDP Calculation
1. Expenditure Approach
2. Production Approach
3. Income Approach
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 111 – ECONOMIC ANALYSIS
Expenditure Approach
The expenditure approach adds all the
expenditures of the end-users of the output
produced in a given year. It divides GDP
into four areas: households (consumption),
businesses (investment), government, and
foreigners (net exports).
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 111 – ECONOMIC ANALYSIS
What are the components of GDP?
GDP
Personal
Consumption
Expenditures
Investment
Government
Net Exports
(I)
(G)
(X-M)
(C)
Fixed Investment
Nonresidential
Inventories
Export
s
Imports
Residential
GDP = C + I + G + (X-M)
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 111 – ECONOMIC ANALYSIS
How much of GDP is each component?
110%
100%
Component
% of GDP
Government
19%
Investment
16%
Consumption (PCE)
70 %
Net Exports
-5%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
-10%
GDP
100%
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 111 – ECONOMIC ANALYSIS
Production Approach
The production approach looks at GDP
from the standpoint of value added by each
input in the production process.
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 111 – ECONOMIC ANALYSIS
Income Approach
The income approach divides GDP
according to who receives the income from
the spending flow. In addition to aggregate
income, national income and personal
income are also used as measures of
income.
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 111 – ECONOMIC ANALYSIS
Expenditure and Income Approach
GDP
Corporate profits
Consumption of fixed capital or Depreciation
Gross private domestic investment
Personal taxes
Personal saving
Government expenditures
Imports
Net interest
Compensation of employees
Rental income
Exports
Personal consumption expenditure
Indirect business taxes
Contributions for social security
Transfer payments
Proprietor's income
Amount
(Billion
Pesos)
305
479
716
565
120
924
547
337
2,628
19
427
2,966
370
394
543
328
Suppose the following
are data for a given
year from the annual
report of NEDA.
Calculate GDP using
the
expenditure
approach and income
approach
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 111 – ECONOMIC ANALYSIS
Expenditure and Income Approach
a. Expenditure Approach
𝐺𝐷𝑃 = 𝐶 + 𝐼 + 𝐺 + (𝑋 − 𝑀)
= 2,966 + 716 + 924 + (427 − 547)
= 4,486
a. Income Approach
GDP
= 𝑐𝑜𝑚𝑝𝑒𝑛𝑠𝑎𝑡𝑖𝑜𝑛 𝑜𝑓 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑠 + 𝑟𝑒𝑛𝑡𝑠 + 𝑝𝑟𝑜𝑓𝑖𝑡𝑠 +
𝑛𝑒𝑡 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 + 𝑖𝑛𝑑𝑖𝑟𝑒𝑐𝑡 𝑡𝑎𝑥𝑒𝑠 + 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛
= 2,628 + 19 + 653 + 337 + 370 + 479
= 4486
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 111 – ECONOMIC ANALYSIS
National Income
GDP
Corporate profits
Consumption of fixed capital or Depreciation
Gross private domestic investment
Personal taxes
Personal saving
Government expenditures
Imports
Net interest
Compensation of employees
Rental income
Exports
Personal consumption expenditure
Indirect business taxes
Contributions for social security
Transfer payments
Proprietor's income
Amount
(Billion
Pesos)
305
479
716
565
120
924
547
337
2,029
19
427
2,966
370
394
543
328
Using the data in no.
8,
compute
the
national income (NI)
by
making
the
required subtraction
from GDP. Explain
why NI might be a
better measure of
economic
performance
than
GDP.
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 111 – ECONOMIC ANALYSIS
National Income
𝑵𝑰 = 𝑮𝑫𝑷 − 𝑫𝒆𝒑𝒓𝒆𝒄𝒊𝒂𝒕𝒊𝒐𝒏
𝑁𝐼 = 4,486 − 479
𝑁𝐼 = 4,007
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 111 – ECONOMIC ANALYSIS
Personal Income and Disposable Income
GDP
Corporate profits
Consumption of fixed capital or Depreciation
Gross private domestic investment
Personal taxes
Personal saving
Government expenditures
Imports
Net interest
Compensation of employees
Rental income
Exports
Personal consumption expenditure
Indirect business taxes
Contributions for social security
Transfer payments
Proprietor's income
Amount
(Billion
Pesos)
305
479
716
565
120
924
547
337
2,029
19
427
2,966
370
394
543
328
Again using the data
in no. 8, derive
personal
income
(PI) from national
income (NI). Then
make the necessary
adjustments to PI to
obtain
disposable
income (DI).
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 111 – ECONOMIC ANALYSIS
Personal Income and Disposable Incom
a. Personal income (PI)
Personal Income (PI) = 𝑁𝐼 − 𝑃𝑟𝑜𝑓𝑖𝑡𝑠 −
𝐶𝑜𝑛𝑠𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛𝑠 𝑓𝑜𝑟 𝑆𝑜𝑐𝑖𝑎𝑙 𝑆𝑒𝑐𝑢𝑟𝑖𝑡𝑦 + 𝑇𝑟𝑎𝑛𝑠𝑓𝑒𝑟 𝑃𝑎𝑦𝑚𝑒𝑛𝑡𝑠
𝑃𝐼 = 4,007 − 633 − 394 + 543
𝑃𝐼 = 3,523
a. Disposable income (DI)
𝐷𝐼 = 𝑃𝐼 − 𝑃𝑒𝑟𝑠𝑜𝑛𝑎𝑙 𝑡𝑎𝑥𝑒𝑠
𝐷𝐼 = 3,523 − 565
𝑃𝐼 = 2,958
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 111 – ECONOMIC ANALYSIS